Canada has a complicated regime for the preparation of disclosure documents as a result of three factors:
- Canada’s franchise legislation falls within the jurisdiction of the provinces, resulting in inconsistent legislation;
- Disclosure documents are not reviewed or filed with any regulatory body; and
- A disclosure document must be current and contain all required information as at the date of its delivery.
- Combining these three factors with the fact that a disclosure document must be prepared for (and relevant to) the specific franchise to which it relates means that, in many circumstances, a standard disclosure document prepared for a new franchise offering must be modified or tailored in resale or renewal situations.
Canadian franchise legislation requires a franchisor to provide a prospective franchisee with a disclosure document not less than 14 days before the signing by the prospective franchisee of any agreement relating to the franchise or the payment of consideration relating to the franchise.
A “franchisee” is defined as a person to whom a franchise is granted and a “franchise” means a right of that particular franchisee to engage in a business meeting certain specific conditions. The “business” which is the subject of a disclosure document is specific. Where the business is a resale or renewing franchise, the disclosure relating to that business will be different than that relating to a new franchise business.
Tailored Disclosure for Resale or Renewal
In preparing a disclosure document where the various provincial exemptions relating to the delivery of a disclosure document on a resale or renewal do not apply, a franchisor must ensure that the contents of the document are relevant to the particular franchise being resold or renewed. A franchisor must also ensure that any inaccurate, irrelevant or inappropriate information relating to new franchises is deleted or amended for the resale or renewal franchise.
Some examples of required information to be included in a disclosure document demonstrate how the relevant information in a disclosure document prepared for a resale or renewal will differ from that required for a new franchise. For example, a list of the costs associated with the establishment of the franchise will be different than the list of costs associated with the establishment of a new franchise. Similarly, if an estimate or annual operating costs is provided, those figures will differ from those of a new franchise since they will generally be known from historical information. The same goes for any earnings projection, if included in the disclosure document. As well, the terms and conditions of financing arrangements, the description of training or other assistance offered and a description of restrictions or conditions relating to termination, renewal or transfer may be different in respect of a particular resale or renewal franchise as opposed to a new franchise.
It is therefore critical for franchisors to ensure that the disclosure documents provided on resales or renewals are specifically tailored to the particular franchises in question. If a franchisor instead provides a standard disclosure document relating to a new franchise offering, a prospective franchisee who eventually enters into the resale or renewal franchise agreement may be able to assert that the disclosure document did not comply with the legislative requirements, and thereby may have a valid claim for rescission of the agreement or damages for misrepresentation.
As a best practice, Osler’s Franchise Law Group recommends that the disclosure document for the resale or renewal of a franchise be specifically prepared for these situations. Alternatively, we recommend that a standard new franchise disclosure document incorporate relevant items pertaining to the possible resale or renewal of the franchise in question. While we appreciate that this practice will be somewhat unfamiliar to franchisors based outside Canada (particularly those based in the United States), we urge careful consideration of the possible consequences of using a standard form new franchise disclosure document on resales or renewals. Canadian requirements in this area can be a trap for the unwary, with potentially very significant consequences.